HNRK Coverage Corner

On September 18, 2018, Justice Hagler of the New York County Supreme Court issued a decision in Aspen Specialty Ins. Co. v. Zurich Am. Ins. Co., 2018 NY Slip Op 32328(U), holding that property owners and their construction manager were not entitled to defense coverage under a CGL policy based on a stop work order issued by the New York City Department of Buildings.

The standard CGL policy at issue in Aspen Specialtyrequired the insurer to defend a “suit,” defined as “a civil proceeding in which damages because of . . . ‘property damage’ . . . to which this insurance applies [is] alleged.”  Under New York law, the duty to defend has been described as “exceedingly broad.”  The duty may be triggered before the filing of a formal lawsuit.  Thus, “New York law . . . permits a demand letter to serve as the functional equivalent of a ‘suit’ . . . where the claimant against an insured assumes a coercive adversarial posture and threatens the insured with probable and imminent financial consequences.”  Carpentier v. Hanover Ins. Co., 248 A.D.2d 579, 580-81 (2d Dep’t 1998). 

Justice Hagler cited Second Circuit cases holding that an “insurer’s duty to defend may be triggered by an administrative agency’s demand letter that commences a formal proceeding against the insured, advising it that a public authority has assumed an adversarial posture toward it, and that disregard of the demands may result in the loss of substantial rights by the insured.” Texaco A/S (Denmark) v. Commercial Ins. Co. of Newark, NJ, 160 F.3d 124, 130 (2d Cir. 1998) (quoting Avondale Indus., Inc. v. Travelers Indem. Co., 887 F.2d 1200, 1206 (2d Cir. 1989)). However, the Court concluded that the stop work order in this case was “insufficiently ‘coercive’ or ‘adversarial’ to constitute the functional equivalent of a ‘suit,’’’ explaining:

. . . [A] stop work order is "an order by the Buildings Department to stop all work at the site, unless otherwise noted on the stop work order.” . . .  The blank form states that "you are hereby ordered to immediately stop all work at the above premises . . . FAILURE TO COMPLY WITH THIS STOP WORK ORDER MAY RESULT IN CRIMINAL CHARGES BEING FILED AGAINST YOU.”  Significantly, Ross [a witness for the DOB] stated that "the stop work order is really the violation itself," and that "the violation is in itself[] the stop work order.”

The notice of violation issued in this case states that the "Violating Conditions Observed" included "failure to adequately support adjoining ground and/or structures during pile driving operations" and noted that there was "[e]xtensive thru-cracking observed running vertically on side and rear walls of 2-story extension of adjoining" building.  Under the heading "Remedy," the notice of violation states "stop all work forthwith," "reevaluate means and methods of installation so as to prevent damage to all property and structures," and "submit all plans and monitoring reports to SEPEX for eng'g revision.”  The notice of violation indicates that it is designated a "hazardous," "class l" violation, requiring an appearance before the New York City Environmental Control Board to determine the amount of civil fines and penalties. The purpose of the hearing was to determine the amount of any fines for violations, not to determine whether the stop work order should be lifted.

Notably, third-party plaintiffs were not directed to perform remediation work. Third-party plaintiffs were not advised that they were facing a lawsuit or imminent financial consequences for failure to comply (compare Kirchner v Fireman's Fund Ins. Co., 1991 WL 177251, *5, 1991 US Dist LEXIS 12244 [SD NY 1991] [insurer was required to defend letter that required insured to conduct an investigation and warned that failure to comply would result in legal action seeking reimbursement for funds expended and penalties]). Third-party plaintiffs point out that the DOB directed that they take affirmative measures to "reevaluate means and methods of installation so as to prevent damage to adj. property and structures," and to "submit all plans and monitoring reports" for review. However, in Ryan [v. Royal Ins. Co. of Am., 916 F.2d 731 (1st Cir. 1990)], the Court found language in letters requesting that the insured submit plans for approval to be insufficiently adversarial (Ryan, 916 F3d at 742).

Rather, the evidence indicates that the stop work order at issue was more like "an invitation to voluntary action" (Technicon [Elecs. Corp. v. Am. Home Assur. Co., 141 AD2d 124, 146]). Indeed, Rosstestified that "we [the DOB] would require a - request the contractor to do it. If he could not do it or failed to do it, we would have HPD step in and do the work.”  The DOB would "give the owner the option to either get it fixed, or we will fix it": In the latter case, the DOB would seek to hold the owner financially responsible for the work. The HPD would place liens on the property to insure payment, and would go to court to seek an order of payment. Ross also testified that the purpose of a partial stop work rescind order was to "allow the site to do some work at the site after a stop work order is issued.” When a partial stop work rescind order is issued, the original stop work order is still in effect; "[i]t gives you an allowance under the stop work order.”  There is no evidence that the HPD ever threatened third-party plaintiffs with litigation in this case. "But the mere possibility of future litigation, indefinite and unfocused, cannot trigger the duty to defend under a CGL policy" (Ryan, 916 F3d at 743).

*          *          *

Consequently, Zurich is not obligated to defend the stop work order issued to third-party plaintiffs.

This decision shows that while the duty to defend is broadly construed, its scope is not limitless, particularly prior to the commencement of formal legal proceedings against the insured.